Active Trading and (Poor) Performance : The Social Transmission Channel

Individuals often invest actively and generate inferior returns. Social interactions might exacerbate this tendency, but the causal effect from peer effects on active trading are difficult to identify empirically. This paper exploits the exogenous...

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Main Authors:	Escobar, Laura, Pedraza, Alvaro
Format:	Working Paper
Language:	English
Published:	World Bank, Washington, DC 2019
Subjects:	STOCK MARKET MARKET PARTICIPATION PEER EFFECTS ACTIVE TRADING PENSION FUNDS SAVINGS BEHAVIOR
Online Access:	http://documents.worldbank.org/curated/en/901281551966282262/Active-Trading-and-Poor-Performance-The-Social-Transmission-Channel http://hdl.handle.net/10986/31361

id	okr-10986-31361
recordtype	oai_dc
spelling	okr-10986-313612022-09-19T12:16:29Z Active Trading and (Poor) Performance : The Social Transmission Channel Escobar, Laura Pedraza, Alvaro STOCK MARKET MARKET PARTICIPATION PEER EFFECTS ACTIVE TRADING PENSION FUNDS SAVINGS BEHAVIOR Individuals often invest actively and generate inferior returns. Social interactions might exacerbate this tendency, but the causal effect from peer effects on active trading are difficult to identify empirically. This paper exploits the exogenous assignment of students to classrooms in a large-scale financial education initiative to evaluate the transmission of trading strategies among individual investors. The paper shows that favorable peer returns on single-stock transactions stimulate market entry among inexperienced investors, even when total portfolio performance among peers is negative. The results are consistent with selective communication: individuals with trading background share their most favorable trades, which attracts others to the stock market. Inexperienced individuals who are exposed to peers with large returns on single trades appear to overestimate the value of active trading. The paper finds that these rookie investors make more stock transactions, trade more speculatively, but also generate inferior returns. The findings show the strength of social communication as a key determinant of financial decision making. 2019-03-07T21:55:15Z 2019-03-07T21:55:15Z 2019-03 Working Paper http://documents.worldbank.org/curated/en/901281551966282262/Active-Trading-and-Poor-Performance-The-Social-Transmission-Channel http://hdl.handle.net/10986/31361 English Policy Research Working Paper;No. 8767 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English
topic	STOCK MARKET MARKET PARTICIPATION PEER EFFECTS ACTIVE TRADING PENSION FUNDS SAVINGS BEHAVIOR
spellingShingle	STOCK MARKET MARKET PARTICIPATION PEER EFFECTS ACTIVE TRADING PENSION FUNDS SAVINGS BEHAVIOR Escobar, Laura Pedraza, Alvaro Active Trading and (Poor) Performance : The Social Transmission Channel
relation	Policy Research Working Paper;No. 8767
description	Individuals often invest actively and generate inferior returns. Social interactions might exacerbate this tendency, but the causal effect from peer effects on active trading are difficult to identify empirically. This paper exploits the exogenous assignment of students to classrooms in a large-scale financial education initiative to evaluate the transmission of trading strategies among individual investors. The paper shows that favorable peer returns on single-stock transactions stimulate market entry among inexperienced investors, even when total portfolio performance among peers is negative. The results are consistent with selective communication: individuals with trading background share their most favorable trades, which attracts others to the stock market. Inexperienced individuals who are exposed to peers with large returns on single trades appear to overestimate the value of active trading. The paper finds that these rookie investors make more stock transactions, trade more speculatively, but also generate inferior returns. The findings show the strength of social communication as a key determinant of financial decision making.
format	Working Paper
author	Escobar, Laura Pedraza, Alvaro
author_facet	Escobar, Laura Pedraza, Alvaro
author_sort	Escobar, Laura
title	Active Trading and (Poor) Performance : The Social Transmission Channel
title_short	Active Trading and (Poor) Performance : The Social Transmission Channel
title_full	Active Trading and (Poor) Performance : The Social Transmission Channel
title_fullStr	Active Trading and (Poor) Performance : The Social Transmission Channel
title_full_unstemmed	Active Trading and (Poor) Performance : The Social Transmission Channel
title_sort	active trading and (poor) performance : the social transmission channel
publisher	World Bank, Washington, DC
publishDate	2019
url	http://documents.worldbank.org/curated/en/901281551966282262/Active-Trading-and-Poor-Performance-The-Social-Transmission-Channel http://hdl.handle.net/10986/31361
_version_	1764474153202614272

Active Trading and (Poor) Performance : The Social Transmission Channel

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